Credit Suisse averts fallout

It has almost become a maxim on Wall Street: When markets implode, the debris will crash down on top of Credit Suisse Group. From the ”burning bed” bridge loan in 1989 to the Russian ruble collapse in 1998 to the dot-com stock bust of 2000, Credit Suisse and its former First Boston securities unit made millions of dollars during the boom only to lose all or most of it in the bust.

So when Credit Suisse Chairman Walter Kielholz and Goldman Sachs Group Inc. chief Lloyd Blankfein, met over breakfast recently and noted their firms’ sidestepping of the subprime-mortgage crisis, it was an auspicious moment for the Swiss bank.

Credit Suisse’s success is even sweeter because its hometown rival, UBS AG, is the one with the big problems. UBS, normally the more staid of the two Swiss giants, has ousted two top executives, taken $14.2 billion in write-downs and losses and was forced to get an infusion of capital from investors in Singapore and the Middle East.

While far from immune from the turmoil in the credit markets, Credit Suisse has largely escaped the subprime woes. In addition, the firm surprised rivals by reaching a deal last week to form an investment-banking joint venture in China.

Historically, Credit Suisse has been management-challenged, says analyst Kian Abouhossein, who follows European broker-dealers at J.P. Morgan & Co. ”You normally have a blowup in this type of environment, but this time they’ve done extremely well,” Mr. Abouhossein said.

Mr. Abouhossein notes that Credit Suisse exposure to risky subprime mortgages and collateralized debt obligations, which are backed by assets such as mortgages, is less than $2 billion, a fraction of the $39 billion held by UBS when the mortgage crisis hit.

One reason for that is Credit Suisse’s management, led by Chief Executive Brady Dougan, began cutting back on the number of mortgages the bank held and originated at the end of 2006.

In 2006, according to figures from Thomson Financial, Credit Suisse ranked No. 5 among underwriters of global CDOs. But this year, the firm dropped to No. 13, reflecting its distaste for the business.

Mr. Dougan, a marathon runner and the first American to be sole CEO of the Swiss bank, isn’t one to thump his chest. ”To me, it doesn’t seem that this was an act of heroism because it seemed pretty clear what was going to happen in the markets,” he said in an interview Tuesday.

Mr. Dougan has kept a low profile, which is serving him well. While Swiss papers are lampooning UBS and Chairman Marcel Ospel for its most recent set of write- downs, Mr. Dougan has impressed the Swiss, particularly after he addressed the annual general shareholders meeting by reading out a speech in German.

Credit Suisse still has some dark clouds on the horizon, especially in the business of financing leveraged buyouts and in commercial mortgage-backed securities.

At the end of the third quarter, Credit Suisse had about $52 billion in leveraged-finance exposure, one of the biggest totals on Wall Street. That market still remains deeply oversaturated with inventory, and banks have continued to take big losses on their underwriting decisions, often having to sell the most senior debt at 95 cents on the dollar.

But even here, Credit Suisse has tried to exercise some discipline in the market, backing away from the financing of Cerberus Capital Management LP’s purchase of Chrysler LLC. Back in the spring, when the junk-debt markets were still buoyant, Credit Suisse bankers initially offered to underwrite a piece of the auto maker’s planned $20 billion sale of leveraged loans. But the investment bank, led by its chief, Paul Calello, pulled back after the credit team advised against taking on the risk, according to Wall Street executives.

Also, three deals that Credit Suisse was involved in financing – TXU, First Data and Bausch & Lomb – have gone to market, reducing the bank’s exposure. A fourth – the buyout of Harman International Industries – has been canceled.

For Credit Suisse stock to rise significantly, Mr. Dougan and his management team will have to persuade investors that they aren’t only good risk managers but also skilled at significantly increasing revenue in its asset-management and private-banking business.

Mr. Dougan’s recipe to make that happen has been to make wealth management, investment banking and asset management – once run as separate fiefdoms – work together, passing clients from one area to the next.

It is no small irony that UBS, for all its woes, has seen its stock hold up relatively well – it is down 23 percent year to date but trades at a higher multiple to earnings than some of its rivals – because its revenue is considered by analysts to be more stable than Credit Suisse’s, thanks to its vast private-banking and asset-management businesses.

Mr. Abouhossein, for instance, rates both Credit Suisse and UBS as a ”buy” but says of the two, he prefers UBS. The ”long-term investment case is better for UBS,” he says.


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